Plan to work longer for more retirement savings? Don't count on it

Although delaying retirement helps financial readiness, it can't be a safety net for everyone

By Greg Iacurci

Nov 13, 2015 @ 12:01 am EST

Staying in the workforce to make up for a retirement savings shortfall has significant financial benefits, but prospective retirees shouldn't consider the strategy a panacea.

Unforeseen circumstances could sideline workers earlier than expected, meaning working in order to amass additional retirement funds may no longer be a possibility for those individuals, financial advisers say.

According to Wells Fargo & Co.'s most recent annual retirement study, half of retired respondents retired earlier than planned. Many left the workforce due to reasons beyond their control: 37% due to health and 21% due to an employer decision. Only 7% retired earlier than planned due to adequate savings.

The Employee Benefit Research Institute's (EBRI) 2015 Retirement Confidence Survey supports these findings — 60% of those who retired earlier than planned did so due to a health problem or disability, and 31% did so because they could afford to.

“What I tell people is, if anything, you want to plan to retire earlier than you think,” Erik Carter, senior financial planner at Financial Finesse, said. “[Working later] is not something you can count on.”

More and more, workers have been inching up projections for the length of their working careers. In 1991, 11% of workers expected to retire after age 65; in 2015, that figure shot up to 36%, and 10% of workers don't plan to ever retire, according to EBRI.

The number of people who expect to retire before 65 has dipped as well over the same time period, to 25% from 50% of workers.

In many financial plans he develops for clients, Mr. Carter aims for a retirement age on the lower end of the scale because it provides a margin of error, he said. For example, if investors say they would like to retire between 62 and 65 years old, he generally gears the financial plan to 62, so if finances don't work out as planned, due to poor markets, for example, the individual can delay retirement until 65.

If someone aims for a retirement age of 67, for example, and the financial plan doesn't pan out as expected, the option to continue working may no longer be there, Mr. Carter said. The concept of lowballing is similar to assuming a 6% return on investments rather than a rosier 8%, he said.

Christopher Van Slyke, partner at WorthPointe Financial, adopts a like-minded approach, targeting a low retirement age like 62. If the individual enjoys work and feels good about continuing to work, they can do so and have surplus money, he said.

“You're not able to do the same work when you're 70 [as when you're younger]. Your mind isn't as sharp, your energy is lower, your skills aren't as up to date,” Mr. Van Slyke said. “You may think you're going to do that, but the market might not be there for your services.”

Of course, for some who engage in retirement planning too late, working later may be one of the few options available to make up for undersized savings.

“Working longer is one of the most powerful ways to solve that problem,” according to Stuart Ritter, certified financial planner at T. Rowe Price. He compares it to a spare tire for a car — it's ideal to not have to use it, but it's useful if it's there.

The realization that one may have to work longer than anticipated is more acute for those closer to retirement, because they have a better picture of what their finances in retirement will look like. According to the Wells Fargo survey, 54% of workers over 60 years old said they'd have to work until at least 70 to have enough retirement savings, whereas that was true for 40% of those ages 55 to 59.

“People figure out how to make it work,” Mr. Ritter said. “If they can't work longer, it's cutting expenses, boosting income.”

Housing is the top expense for those over age 65, so economizing in this area would provide the largest financial windfall, according to Mr. Ritter. Taking on a boarder or roommate is an option for additional income, he added.

A reverse mortgage could provide an income stream as well, according to Mr. Carter. Partial annuitization of assets could potentially provide for more income from the same asset base — if a client were targeting a 4% annual drawdown of assets, an annuity may provide a higher annual payout, Mr. Carter added.

For those who remain in the workforce longer than anticipated due to shaky finances, the idea of a “practice retirement” could come into play, Mr. Ritter said. That would entail continuing to work, but using any money that would been put into a 401(k) account and beginning to spend it now — spending the money on vacations, for example.

Investors therefore continue earning an income stream and delay tapping retirement funds, but don't miss out on large market gains on that money due to the short time frame in which the interest could accumulate.

“There are people that say if I don't have to delay the fun, that's a compromise I'm willing to take on,” Mr. Ritter said.

Of course, for those still able to work but who don't want to do so full-time, part-time employment provides financial as well as psychological benefits, Amy Jo Lauber, president of Lauber Financial Planning, said.

“I think people should consider delaying retirement, although that doesn't mean working full time until you're 70,” Ms. Lauber said. People can pursue something they love doing through part-time employment rather than reducing hours at a current job, she added.

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